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Renting part of your Ontario house? Research tax rules before you do

With interest rates at an all-time low and the real estate market steaming along, many are tempted to buy a home with the idea that renting out a portion of it could help them finance their dream.

When you charge full market rent on a portion of your home, the money from your tenants will help pay your mortgage — but it is also considered income you must report to the Canada Revenue Agency.

However, for someone looking to rent out a portion of their home, there are legitimate ways to reduce your rental income. You just need to know the rules.

“It’s pretty black and white when you buy a home and rent it out entirely — you can right off all the expenses associated with it,” says Cleo Hamel, senior tax analyst with H&R Block Canada. “But when you’re using a portion of your own home, such as a basement apartment, it’s definitely a little bit more grey.”

Capital gains exemption: When you own a home, you get a capital gains exemption (when you buy, the home generally appreciates in value; when you sell your house, you don’t have to claim any capital gains).

However, when you rent your home, you have to be careful because you could lose that capital gain exemption. As examples, if you decide to claim capital cost allowance on the portion of your home that is the rental, or if you rent more than 50 per cent of your house, it ceases to be considered a personal residence.

“You’ve got to really watch that,” says Hamel. “People will buy a duplex or fourplex where they think they will live in it and ‘write off all of my expenses.’ You have to look at what portion is personal use, and what portion is rental.”

Percentage of home: Then there is the issue of what kind of expenses you can claim. If, for example, you’ve decided to rent out the basement or a room, you have to decide what percentage is being rented out. Is it 30 per cent or 40 per cent?

“The easiest way is by calculating the square footage of the house being used for rental. That will give you a place to start in terms of how to allocate expenses as well,” says Hamel.

The other thing to consider is if there are shared portions of the home — such as the kitchen, bathroom or laundry facilities — you can’t automatically say those areas belong to the rental because there is typically also going to be a personal use portion.

Hamel says the CRA requires the homeowner to indicate what percentage of time the renter is using those shared spaces. Is the laundry being used two days a week or 50 per cent of the time? Is the kitchen being used only half of the time?

“That’s where it’s a good idea if you are renting out part of your home to give the tenant their own bathroom. That way it’s easier to determine what percentage is part of the rental,” says Hamel.

Generally, she says, landlords determine that one-third of the house is being occupied and used by the tenant — keeping it below the 50 per cent cut off.

Expense claims: In terms of expenses, only those expenses associated with the rental can be claimed and include things such as when you replace the carpet when a renter leaves, or items specific to the rental portion of the home.

“When we get into things like interest on your mortgage or property taxes or home insurance, you can’t claim 100 per cent of those expenses, you can only claim one-third,” says Hamel.

Maintenance: Then there are repairs and maintenance, which can also be a grey area. If you have to replace the roof on the home, it’s pretty tough to allocate that cost entirely to the rental part of the house. Replacing a roof appreciates the value of a home and is a capital expense.

“One of the challenges is: when you have a home, it generally appreciates,” says Hamel. “And when you claim capital cost allowance or depreciation, you are taking a tax deferral on the value. But when you sell, you would have to claim all of that as income and that can be a huge hit.”

A water heater or furnace also falls into the same category as the roof, but if you are replacing a washer or dryer, you could depreciate those items in your rental expenses. As well, things like paint to touch up the rental unit of the home or a new faucet in the tenant’s bathroom would also fall into items you could claim a portion of against rental income.

Research rent: It’s also smart to do the research on what the fair market rent is in your neighbourhood, not just so you get a good return for your unit, but for tax purposes as well. Hamel notes that if you’re renting out a room or a basement apartment to a family member or friend at a lower than market rental rate, you may not be able to claim the income or expenses even though you may view it as a rental agreement.

“If it’s not fair market value, you wouldn’t get to claim it,” she says. “You have to ask, ‘Am I looking to make enough to cover expenses or am I in it to make money on it?”

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